Are Developing Countries Held Back by their Management? John Van Reenen (LSE) IGC Growth Week With Nick Bloom (Stanford) & Raffaella Sadun (HBS), Ohio, USA Maharashtra, India

Key results from a decade of management research 1) Developing country management poor by global standards 2) Management practices play a key role in productivity 3) What holds back management & how can policy change? Huge potential for faster growth.

LARGE PRODUCTIVITY DIFFERENCES BETWEEN COUNTRIES This illustrates TFP important for GDP per capita; ii) Huge differences in GDP per capita and TFP between countries; iii) TFP accounts for about ½ of GDP per capita differences Source: Jones and Romer (2010). US=1

But there is still a wide debate – many people claim management is all “hot air” “No potential driving factor of productivity has seen a higher ratio of speculation to empirical study” - Chad Syversson (2011, Journal of Economic Literature) Slew of management books at airport Baker and Holmstrom, 1995 on Internal Labor markets in AER: “Too many theories, too few facts”

BLOOM - VAN REENEN (2007) SURVEY METHODOLOGY 1) Developing management questions Scorecard for 18 monitoring (e.g. lean), targets & people (e.g. pay, promotions, retention and hiring). ≈45 minute phone interview of manufacturing plant managers 2) Obtaining unbiased comparable responses (“Double-blind”) Interviewers do not know the company’s performance Managers are not informed (in advance) they are scored Run from LSE, with same training and country rotation 3) Getting firms to participate in the interview Introduced as “Lean-manufacturing” interview, no financials Official Endorsement: Bundesbank, Bank of England, RBI, etc. Run by 150 MBA types (loud, assertive & business experience)

Example monitoring question, scored based on a number of questions starting with “How is performance tracked?” Score (1): Measures tracked do not indicate directly if overall business objectives are being met. Certain processes aren’t tracked at all (3): Most key performance indicators are tracked formally. Tracking is overseen by senior management (5): Performance is continuously tracked and communicated, both formally and informally, to all staff using a range of visual management tools

Example incentives question, scored based on questions starting with “How does the promotion system work?” Score (1) People are promoted primarily upon the basis of tenure, irrespective of performance (ability & effort) (3) People are promoted primarily upon the basis of performance (5) We actively identify, develop and promote our top performers

Methods 15,000 firms in 32 countries 4 major waves: 2004, 2006, 2009, 2013 (& now!) Plant managers in medium sized manufacturing firms (50-5,000 workers, median≈250) Now extended to hospitals, retail, schools, etc. Extension to Census surveys (e.g. US MOPs; pilot in Pakistan with Ali Choudhary of PSB)

Management Practice Scores Across 32 Countries Note: Data as of April 2014; 13,264 observations over 10,668 firms; 32 countries

Average management scores across countries are strongly correlated with GDP per capita Note that residual from per capita GDP line is identical for US as it is for Japan suggesting that it’s not American “Management B.s. Ability” (MBA)

In India and Africa not all firms are bad – many are world class In India and Africa not all firms are bad – many are world class. The problem is the large tail of bad firms US Density India Density Management score Source: www.worldmanagementsurvey.com

MY FAVOURITE QUOTES: The traditional British Chat-Up [Male manager speaking to an Australian female interviewer] Production Manager: “Your accent is really cute and I love the way you talk. Do you fancy meeting up near the factory?” Interviewer “Sorry, but I’m washing my hair every night for the next month….”

MY FAVOURITE QUOTES: The traditional Indian Chat-Up Production Manager: “Are you a Brahmin?’ Interviewer “Yes, why do you ask?” Production manager “And are you married?” Interviewer “No?” Production manager “Excellent, excellent, my son is looking for a bride and I think you could be perfect. I must contact your parents to discuss this”

Key results from a decade of management research 1) Developing country management poor by global standards 2) Management practices play a key role in productivity 3) What holds back management & how can policy change? Huge potential for faster growth.

Productivity is higher in better managed firms Management is an average of all 18 questions (set to sd=1). TFP residuals of sales on capital, labor, skills controls plus a full set of SIC-3 industry, country and year dummies controls. N=8314

LINK BETWEEN PRODUCTIVITY & MANAGEMENT HOLDS TRUE ACROSS DIFFERENT COUNTRIES Labour productivity* Labour productivity* U.S. U.K. CN JP management practice score** Labour productivity* Labour productivity* FR DE IT PT SE PL GR U.S., U.K. Correlation of 0.96 China Japan Correlation of 0.95 France, Germany, Sweden, Poland Correlation of 0.93 Italy, Portugal, Greece Correlation of 0.98 * Log scale (sales per worker) ** Firms are grouped in 0.5 increments of assessed management score management practice score** LOX-AAA123-20050610-

These management scores positively correlated with many other measures of firm performance Profit Output growth Productivity Exporters R&D per employee Patents per employee Management score decile

To investigate causality we ran an experiment on 28 large textile plants near Mumbai

Inventory Control: Before

Inventory Control: After

Factory operations: Before

Factory operations: After

Stores: Before

Stores: After

Factory information: Before

Factory information: After

Productivity (output per worker) These simple management improvements increased productivity by 20% within 1 year alone Treatment plants Productivity (output per worker) Control plants Weeks after the start of the management experiment Source: Bloom et al (2013)

Management gaps with US account for ~20% of productivity differences Deficit with US TFP Deficit With US % accounted for By management Sweden -0.27 0.32 0.04 Japan -0.34 0.34 0.05 Germany -0.45 0.18 0.19 Canada -0.49 0.22 0.17 Britain -0.75 0.20 0.27 Mexico -0.77 0.60 0.12 Poland -0.81 Italy -0.82 0.31 Spain -0.93 0.30 France -1.02 0.25 0.29 Brazil 0.15 Chile 0.54 India -1.09 0.81 Kenya -1.14 0.98 0.10 China -1.19 0.78 Argentina -1.2 0.57 Tanzania -1.3 0.97 Ghana -1.8 0.87 Zimbabwe -2.09 0.95 Mozambique -2.17 0.79

Key results from a decade of management research 1) Developing country management poor by global standards 2) Management practices play a key role in productivity 3) What holds back management & how can policy change? Huge potential for faster growth.

Multinationals Appear to Achieve Good Management Practices Wherever They Locate Foreign multinationals Domestic firms Management score Sample of 7,303 manufacturing firms, of which 4,926 are purely domestic and 2,377 are foreign multinationals. Domestic multinationals are excluded – that is the domestic subsidiaries of multinational firms (like a Toyota subsidiary in Japan).

Competition ASSOCIATED WITH BETTER Management Manufacturing and Retail (the private sector) 2.8 2.85 2.9 2.95 3 1 2 to 4 5+ Management score Number of Reported Competitors Sample of 9469 manufacturing and 661 retail firms (private sector panel) Reported competitors defined from the response to the question “How many competitors does your [organization] face?”

Family-run firms typically have the worst management 2.7 2.8 2.9 3 3.1 3.2 Dispersed Shareholders Private Equity Family owned, non-family CEO Managers Private Individuals Government Family owned, family CEO Founder owned, founder CEO Note Germany Management score (by ownership type) Management scores after controlling for country, industry and number of employees. Data from 9085 manufacturers and 658 retailers. “Founder owned , founder CEO” firms are those still owned and managed by their founders. “Family firms” are those owned by descendants of the founder “Dispersed shareholder” firms are those with no shareholder with more than 25% of equity, such as widely held public firms.

Education for Non-Managers and Managers Appear Linked to Better Management 2.5 2.6 2.7 2.8 2.9 3 3.1 1 to 10 11 to 25 26 to 50 50+ 2.6 2.7 2.8 2.9 3 3.1 3.2 3.3 1 to 10 11 to 25 26 to 50 50+ Management score Percentage of employees with a college degree (%) Sample of 8,032 manufacturing and 647 retail firms.

…and self-scores show no link to performance

In fact we formally investigated if firms can self-assess their management practices…. We asked at the end of the survey: “Excluding yourself, how well managed would you say your firm is on a scale of 1 to 10, where 1 is worst practice, 5 is average and 10 is best practice”

…and found firms are too optimistic on management “Average”

POLICY IMPLICATIONS Openness to FDI Competition Succession planning for family firms Human capital Role for advice/information Barriers to expansion Trust outside family Rule of law

MY FAVOURITE QUOTES: The difficulties of defining ownership in Europe Production Manager: “We’re owned by the Mafia” Interviewer: “I think that’s the “Other” category……..although I guess I could put you down as an “Italian multinational” ?” Americans on geography Interviewer: “How many production sites do you have abroad? Manager in Indiana, US: “Well…we have one in Texas…”

Don’t get sick in Britian MY FAVOURITE QUOTES: Don’t get sick in Britian Interviewer : “Do staff sometimes end up doing the wrong sort of work for their skills? NHS Manager: “You mean like doctors doing nurses jobs, and nurses doing porter jobs? Yeah, all the time. Last week, we had to get the healthier patients to push around the beds for the sicker patients” Don’t do Business in Indian hospitals Interviewer: “Is this hospital for profit or not for profit” Hospital Manager: “Oh no, this hospital is only for loss making”

Some quotes illustrate the African management approach Interviewer “What kind of Key Performance Indicators do you use for performance tracking?” Manager: “Performance tracking? That is the first I hear of this. Why should we spend money to track our performance? It is a waste of money!” Interviewer “How do you identify production problems?” Production Manager: “With my own eyes. It is very easy”

MY FAVOURITE QUOTES: Don’t get sick in India Interviewer : “Do you offer acute care?” Switchboard: “Yes ma’am we do” Interviewer : “Do you have an orthopeadic department?” Switchboard: “Yes ma’am we do” Interviewer : “What about a cardiology department?” Switchboard: “Yes ma’am” Interviewer : “Great – can you connect me to the ortho department” Switchboard?: “Sorry ma’am – I’m a patient here”

More results and data available here

Management across 3 sectors in US: Main reason for difference is people management (e.g. hiring/firing; promotion, etc.) Schools Hospitals Manufacturing Link to Hanushek point Source: Bloom, Lemos, Sadun, Scur & Van Reenen (2014)

Management gaps with US and fraction due to reallocation